Wednesday, March 6, 2013

China's Shale Gas Dream

China, consuming energy at the fastest pace among major economies, has set ambitious targets to exploit its reservoirs of shale gas, the same fuel the U.S. touts as the means to energy independence. It won’t meet them.

China is producing no commercial quantities of shale gas yet has set a target of 80 billion cubic meters by 2020, or 23 percent of total expected demand. Output in 2020 will likely be 18 billion cubic meters, according to the average estimate of seven analysts surveyed by Bloomberg. That’s more pessimistic than a year ago when the forecast was 23 billion cubic meters.

China Shale Gas Map

“China’s production targets are not realistic,” Chris Faulkner, chief executive officer of Dallas-based shale driller Breitling Oil and Gas Corp., which is in talks in China, said in an e-mail. “The only way China is going to be able to meet its output goals is for the government to pour money into exploration and development and ease up on the price controls.”

By dictating fuel prices in a centrally controlled economy, China has discouraged investment in shale because drillers risk losing money. The result: China National Petroleum Corp. and China Petrochemical Corp., the two largest gas producers, didn’t win exploration blocks in the last auction while companies with zero gas-drilling experience did.

China Shale Gas Distribution

Missing targets to develop the world’s biggest reserves of shale means China’s imports from foreign gas markets will be greater than anticipated. Such purchases might benefit suppliers of liquefied natural gas from Exxon Mobil Corp. to Woodside Petroleum Ltd., while bolstering supply from nations like Turkmenistan that pipe gas to China.
Second Auction

China is spending $17 billion a year on natural gas imports, about half in the form of liquefied natural gas. The country will open a record number of LNG receiving terminals this year, proving a boon for more than $100 billion of projects being built by companies such as Exxon Mobil and Chevron Corp. in Australia and Papua New Guinea.

The lack of shale enthusiasm was evident in December at the government’s latest and biggest auction of blocks of land containing natural gas trapped in shale rock strata. Coal miners and provincial government investment firms with no experience of shale drilling were among winning bidders. The bids by the big two gas producers and China National Offshore Oil Corp., the largest offshore oil producer, failed.

Awarding shale gas prospects to inexperienced companies in the second auction and government price controls on natural gas are likely to ensure imports continue to rise.

“If you want to kick start this industry quickly from zero now, you need to either introduce a massive subsidy or allow free market forces to prevail,” James Hubbard, an analyst at Macquarie Group, said. “You’ve got 20 blocks that have just been awarded to companies no one has ever heard of.”

The government would need to increase the subsidy to 1.5 yuan (24 U.S. cents) a cubic meter from the current 0.4 yuan to effectively spur growth, Hubbard said. The 0.4 yuan subsidy is 17.5 percent of the current 2.28 yuan price that Beijing residents pay for piped gas.

China Shale fields

“More incentives need to be introduced,” Wang Guoqiang, chairman of China-based oilfield service provider SPT Energy Group Inc., said in an interview on Jan. 29. Wang is investing more in Central Asia and the Middle East to hedge the prospect that China’s shale industry doesn’t take off.

Lacking Technology

Natural gas in New York has declined 4.9 percent this year. The fuel fell to a decade low of $1.91 per million British thermal units in April last year from a record of $13.92 per million Btu in Sept. 2005 as the U.S. ramped up commercial production of shale gas. The U.S. ousted Russia as the world’s biggest gas producer in 2009.

China Shale Gas Production

Futures rose 1.1 percent to $3.19 per million Btu on the New York Mercantile Exchange as of 11:52 a.m. Singapore time.

Drillers in China have yet to produce shale gas commercially, with Royal Dutch Shell Plc helping CNPC to sink the nation’s first horizontal well in 2011. Total SA, Europe’s third-largest oil company, said last week it was in “advanced talks” with a Chinese partner to explore for shale gas.

Cnooc Ltd. and China Petrochemical, also known as Sinopec Group, have invested more than $5.7 billion in so-called unconventional oil and gas assets overseas, yet they find their technology lacking at home.

Shale gas reserves by country

No Experience

“None of these companies have the below-ground experience of oil producers,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, said in an interview. “They need to partner with other companies to even come close to the targets.”

Two phone calls each to Sinopec and CNPC’s offices today seeking comment were not answered and no voicemail was available to leave messages.

Without unlocking shale gas reserves, China’s only option is to import more LNG.

This year, China may add five LNG terminals with an annual capacity of 15.7 billion cubic meters, the highest in a single year, the Paris-based International Energy Agency said in report last year.

Those terminals, being built by companies including Cnooc and China Petroleum & Chemical Corp., would increase the nation’s LNG import capacity by 54 percent from the current 29 billion cubic meters a year, according to the report. Another 7.5 billion cubic meters a year is under construction and will be completed by 2015. The first plant started in 2006.